Securing the bag
I went through a blitz of fraud-related reading over the last month or so (scroll to the end if you want recommendations and reviews), prompted by a weirdly clustered collection of conversations on the topic. I find it extremely interesting to study, partially I think because it appeals to my loss aversion mindset but also because it tends to highlight just how much of a high-trust environment that most of us operate in.
My simplistic categories of fraud (in escalating subtlety) are:
I’m-Stealing-Your-Money fraud: deliberate acts to displace money (‘I have taken your money’)
Everything-is-Securities-Fraud fraud: this is mostly about false information (‘please send me money for this time machine’)
Wrongful-Spending fraud: spending shareholder money on obviously non-company things (‘I have spent your money on a gold-plated couch for my house’)
Now fairly obviously, frauds can fit into two or even all three of those categories. By virtue of Matt Levine exhaustively (and excellently) covering category 2 in his newsletter, I tend to be more interested in the other two areas.
I have always wondered at what point platform companies specifically run the risk of being accused of Wrongful-Spending fraud when they’re aggressively investing in ecosystem-related initiatives which, even in success, probably only benefit the company marginally? Maybe in 2024’s operating environment this is the only way? I don’t know. However I could imagine that with more private companies continuing to not go public, it’s inevitable that we start to see more scrutiny on this category of thing.
Although you often see plenty of stories about Wrongful-Spending fraud in VC-backed startups, I’m always surprised to see there isn’t more I’m-Stealing-Your-Money fraud. I mean yes there was FTX but I think that was a slightly more complex situation (which started as Everything-is-Securities-Fraud fraud which evolved into I’m-Stealing-Your-Money fraud and then may or may not have also included a sprinkling of Wrongful-Spending fraud). Dan Davies has made the point that the optimal amount of fraud in a system is not zero and I think this might be true for VC as well. I had always felt slightly sorry for the media treatment of Sequioa in FTX. Okay sure, they didn’t catch things in diligence but to some degree1 one measure of whether your VC fund is sufficiently close to the bleeding edge is the percentage of fraud in their portfolio.
Stepping away from the corporate landscape, I was recently looking into opportunities around stealing from old people. Reported fraud in the US2 has been growing on average by ~13% annually since 2018 (unsurprisingly much more during Covid) and the conventional wisdom is that this is predominantly people over the age of 65. Curiously though, when you look at the 2023 data, the number of reported frauds by 30-39yr olds is identical to the 60-69 bracket (with a material dip in the separating age bands). There are lots of caveats here but the consumer surface area of I’m-Stealing-Your-Money fraud remains one with lots of problems to solve.
“Gimme the loot” - Biggie Smalls
Reading recommendations
Lying for Money by Dan Davies (who also writes an excellent newsletter): A rare addition to my Founder Essentials list, this was one of those books which opens up your eyes to how systems work by looking at all the things which aren’t meant to happen.
Number Go Up by Zeke Faux: I suspect everyone has read some version of FTX’s history by now but if you haven’t, this is an excellent choice.
Billion Dollar Whale by Tom Wright: I feel the 1MDB fraud really didn’t get enough coverage despite it being a near-sovereign level operation. Superbly written and will make you ask more questions about where your investments actually go…
Other than the world of fraud, I have both a general interest in how systems and organisations decay and a specific interest in the vaguely mysterious Sea Peoples (who show up in all kinds of ancient stories). So Eric Cline seems to have written 1177BC: The Year Civilization Collapsed specifically for me. More excellent evidence for how our ancient past was far more sophisticated than we thought.
Things I’m still mulling over
When you look at attitudes to advertising, there is an interesting story to be written about the last generation of social platform builders (Zuck, Spiegel, Brin/Page, Williams/Dorsey) versus the new generation (Sweeney, Citron, Baszucki. In general (and I’m very interested to hear counter-views), Meta/Google/then-Twitter/Snap were all default advertising models, whereas the newest crop of social platforms (Fortnite/Roblox/Discord) are decidedly not. There are some obvious factors like business model starting points (free versus some form of paid/IAP) which creates an internal quality bar to revenue. It’s also a curiosity that the average age of the newest generation (although not the median) is older than the former.
Which should probably be looked at with some other measure of technical competence
From the FTC’s 2023 Data Sentinal Network report